Gillian Tett asks if banking culture has really changed

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Ten years ago, the world was rocked by a financial crash and I was reporting from the FT newsroom. We are in a very dangerous moment right now for the financial markets. In the last decade, there has been extensive debate about how and why the crisis happened. But this film looks at a crucial issue which is often ignored - culture.

Culture is the single most important thing in any organisation.

The human flaw that took central bankers by surprise.

One of the most extraordinarily important issues in the marketplace is how powerful fear is.

They wanted that pay so much that they don't care about how they're regarded.

It's really about how people behave particularly when they're not being watched.

We're seeing today what is perhaps one of the most dramatic days -

Well, effectively, what we're seeing is a massive explosion of risk aversion.

99% of the time, they did the wrong thing - giving loans to people who they know will not be able to pay them back. You're asking me about the culture. It wasn't really a culture. It was more like a cult.

Personally, I've always been fascinated by culture since I trained as an anthropologist before I became a journalist. But before 2008, I'd sometimes feel embarrassed to tell bankers or regulators about this background since it seemed that the only thing that mattered was maths or economics or astrophysics. But these days, that's changed because if there's one thing we learned in 2008 in the great credit crisis, it's that there's a reason why the roots of the word credit comes from the Latin credere, meaning to believe.

It's a social construct, not just about numbers or algorithms or computers. And to understand finance you have to look at what creates trust, what binds people together, what shapes how they behave - in the wider world, inside banks, central banks, and markets. Now there's a growing recognition that we need to look at culture, not just at computers.

I'm going to interview Alan Greenspan because he was a central banker amongst central banks. He was called the maestro because he was seen as being all powerful and having a really good sense of how the economy and the financial system was working. He was also someone who championed the idea of using models, this idea that free markets were self-healing and that they would always allocate resources to where they needed to go. And in fact, Alan Greenspan himself came out and told Congress subsequently that there had been a flaw in his thinking.

Yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.

You found a flaw in the reality -

A flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

In other words, you found that your view of the world, your ideology, was not right. It was not what working -

It had - precisely.

After the crisis, there was a dramatic reassessment. Alan Greenspan presided over this crazy large credit bubble. And he hadn't spotted it because he put so much faith in his models and his concept of self-healing free markets.

How are you? Great to see you. Good to see you. After the crisis, you then said to Congress that you thought there had been a flaw in some of your thinking.

What I hadn't been aware of is the fact that my own self-interest was actually conceptually wrong. I originally assumed that people were acting wholly rationally or, if not wholly rationally, closely approximate to that. That is factually inaccurate.

One of the most extraordinarily important issues that I've seen in the marketplace is how powerful fear is as differentiated from euphoria. And the data showed very clearly that as people in the stock market, for example, tend to sell much more rapidly and much more heavily and are frightened so that they pull back. Whereas euphoria, that is a much slow, drawn-out process. I thought I knew about as much as I could know about markets going all the way back into - well, into the last century. But I was mistaken.

Do you think that the culture of finance and markets has changed since the crisis?

It's changed a lot of people's views. It's really quite extraordinary when you go back and look at the Wall Street forecasting groups, the various different banks who are publishing all sorts of data. Nobody got it right. There are lots of people who say they did. Thank you, no.

It was striking that the financial crash appeared to come as a surprise to central bankers on both sides of the Atlantic and that more wasn't done to avert the crisis.

I mean, that something as small as the US subprime market can bring down the whole of global finance is incredible.

Ex-deputy governor of Bank of England Paul Tucker is, like Alan Greenspan, able to see the flaws in the thinking of the time.

London over there, the Bank of England lost influence over the banking system because that function was taken away. And in the Fed in the US, the Greenspan Fed lost interest in it because he personally - that wasn't where his heart was. That wasn't where he went in every morning.

So are you basically arguing the problem with finance is that bankers will always be greedy and always go mad because that's just kind of the culture of money? And the issue is that actually, the central banks should try and keep control of that? Is that -

There's a dynamic that pushes banking and the penumbra of banking to excess. It doesn't mean everyone goes in every day and tries to drive the coach over the edge of the cliff. But that's in it always.

And it isn't even to do with the extraordinary amounts of money they are now paid for doing something that isn't so terribly difficult. So if that's the given, the big questions are, well, why do we allow banking at all? Given that we do allow it and we're going to carry on allowing it, then we need independent authorities who will ensure that the system is resilient.

So how do you tackle this human flaw? Well, as it, happens the Federal Reserve in New York and the Banking Standards Board in London are each trying to find ways to observe, measure, and improve culture.

One of the things that we learned during the financial crisis was that behaviour and conduct at financial institutions played a critical role in outcomes. And we can look at things like the scandals around Libor and foreign exchange trading and sales practises, all of which had a behavioural component. And that led us to shine a spotlight on behaviour and conduct at firms, which is driven at a root cause level by the culture at the firms.

This is about how a business runs and how the people in it actually do things.

So it's like anthropologists with big data trying to use ways - or use techniques to actually track what bankers are doing, what they're feeling, to work out whether they have a good culture or not.

Speaking up seems to be a challenge. What's interesting for us is there are two main causes. One's fear. People don't speak up because of the fear of negative consequences. But interestingly, people in banking also don't speak up because they think nothing will happen.

If you were advising the CEOs of banks today, what would you tell them about building a better culture or handling the cultural question?

I don't think they'd understand what I was talking about. In fact, I know that.

But is it really true that banking CEOs were not, and they're still aren't, thinking about culture? Well, in 2008, Bob Diamond was chief executive of Barclays Bank -

Hey, hey!

- and was portrayed as a representative of fat cat banking. So I put the question to him.

What about the culture inside finance? Do you think that the culture of banking has changed?

You know, culture is the single most important thing in any organisation, whether it's government or private sector. And it's no different in financial services. What I worry about is that we get the right balance between a safer and sounder financial system with one that can still promote jobs and economic growth.

And so we need the culture within banking of a willingness to take risk on behalf of clients, a willingness to lend into the economy. And that's how we get stronger economies. And that's how we get job creation. And so that responsible risk taking is - is the critical piece.

But how do you create a culture of responsible risk- taking?

I think you never want to go to one extreme or the other. So are the regulators important? Of course.

Can we count on the regulators to be managing the banks? No. Leadership matters.

You said in public a few years ago that you thought the time for remorse was over. It's time to move on. Do you think that's still the case?

That is not what I said.

OK.

That is what you quoted me as saying. And I think there were two things at the time that were missed. One was the context. The context of when I said that was in early 2011, and it was specifically, its time to pass the mantle of growth, the mantle of growth to the private sector from the public sector.

And do you think people thought enough about culture in the past, or did they just ignore it?

You know, every bank might have been different. I know in our institution it was something that we thought about every single day. And I think in many institutions that would be the case as well.

It was a risk-taking culture within some institutions that was blamed for creating the bubble that would soon burst, especially within the lending industry and in particular as subprime mortgage lenders such as Countrywide.

Every one of them was turned down for a home loan by three different lenders. I'm with Countrywide, and I got them all approved.

Michael Winston was an executive at Countrywide Financial in 2008 and was one of the very few people to blow the whistle on the culture he found there when he joined in 2005. He paid a heavy price.

And I said, who do you usually hire? And he said, bottom quartile, low level schools. Why would you do that?

They are hungrier. Maybe we're the only ones who would hire them. Yes!

Why would you want to do that? Well, because those people are pliable. They'll do whatever we tell them to do.

They say jump, you say how high. That was the Countrywide culture. You know, Countrywide had 65,000 people.

I saw people deliberately look the other way. Well, I was going to look at it, and I was going to either set it right or contact the government officials. And I did.

Michael claims that there was a culture at Countrywide where staff were encouraged to seek risky subprime loans without concern for the overheating housing market or threat to the economy, a culture of greed and fear.

People are afraid to sound the alarm because of companies like Countrywide that retaliate instead of praise the person's courage and bravery. Don't shoot the messenger.

This begs a crucial question. Are we really safer now?

I think banks are safer and sounder. Particularly, the systemic banks are safer and sounder. We're nine years into an economic recovery from probably the deepest, darkest recession we've ever seen since 1929. My worry is have we still got the policy tools on the monetary side and the fiscal side if we have a crack in corporate credit?

We won't be able to spot where the next crisis comes from. The question is, is the system resilient enough when the shock hits? And then if it proves resilient, it will still be bad. Recessions are bad. But not all recessions end up in a massive collapse with social, cultural, political, even constitutional consequences.

I believe there will be another financial crisis. I don't think it - I know it, bone-deep, deep in my heart, because the same half-truths and empty promises and outright lies are being told by executives in financial services firms. Do you think that we are in another bubble period which will have another market crash or a crisis?

We're actually in a somewhat different type of world now. We've basically run into a populist environment. Populism - I don't think that is a rational approach to develop economic - economies. It's a scream of pain.

So a decade after the financial crisis, what did we really learn? Well, we learned that finance does not function without faith or trust or credit in the old fashioned Latin sense of the word. And we learned that trust cannot be predicted with mere models.

So could trust crack again in finance over there? Well, maybe - parts of the financial system today are certainly a lot healthier. Other parts are not.

However, maybe the really big question we should also ask is, what about trust in the wider political economy? Because these days, we live in an era of growing populism and protests and anger. And this can't all be blamed on the financial crisis, but in some ways, it is the next stage of that drama.

And that is why leaders of all stripes today need to relearn that lesson - that trust is crucial. To build it, you have to understand how human culture works. And once trust or credit is lost, it's very hard to regain.